- What changed?
- How was the change implemented?
- At what stages is the revised test relevant?
- Why was the change introduced?
- What are the implications for commercial parties?
For cases commenced on or after 1 April 2013 there is a revised test of proportionality, which provides that costs incurred by a party are proportionate if they bear a reasonable relationship to:
- the sums in issue in the proceedings;
- the value of any non-monetary relief in issue in the proceedings;
- the complexity of the litigation;
- any additional work generated by the conduct of the paying party; and
- any wider factors involved in the proceedings, such as reputation or public importance.
The revised rule expressly states that costs which are disproportionate may be disallowed or reduced even if they were reasonably or necessarily incurred. This contrasts with the previous approach, based on Court of Appeal guidance in Lownds v Home Office  EWCA Civ 365, under which costs were in effect deemed to be proportionate if they were both necessary and reasonable.
The revised proportionality test does not apply to cases commenced before 1 April 2013. Further, where a case has been commenced after that date, costs incurred in respect of work done before that date will not be disallowed if they would have been allowed under the previous rules.
From 1 April 2013 there was also an amendment to the "overriding objective", to which the court must seek to give effect whenever it exercises any powers, or interprets any rule, under the Civil Procedure Rules (CPR). The amended version provides that the overriding objective is to enable the court to deal with cases justly "and at proportionate cost".
The revised test is relevant not only when costs are assessed, but at all stages of the action, due to the reference in the overriding objective to the requirement to deal with cases "at proportionate cost".
It is clearly relevant where the court has made a costs management order (see "Costs management"), as the court must consider questions of proportionality in approving or disapproving the parties' budgets and any revisions to them. (See for example "High Court declines to approve parties’ costs budgets, describing them as disproportionate and unreasonable" for a case where the court declined to make a costs management order, saying that both parties’ budgets were disproportionate and unreasonable where they were £1.6 million in aggregate compared to a claim of £1.1 million.)
It is of course also relevant at the assessment stage. Where costs are assessed on the standard basis, the costs judge will only allow costs to be recovered which are both reasonably incurred and reasonable in amount, as well as being "proportionate" (with any doubt resolved in favour of the paying party). Unlike the previous approach, the revised proportionality test is applied on a global basis and may restrict the extent to which costs are recoverable even if they have been reasonably and necessarily incurred. See "Courts taking tough line on disproportionate costs" for an example of the court's approach (but NB the decision in that case is subject to appeal).
As recommended by Lord Justice Jackson, the revised test is intended to act as a longstop to prevent costs becoming disproportionate to the value, complexity and importance of the claim.
The greatest impact is on small to medium sized cases, where there is the greatest risk of costs being disproportionate.
However, the changes may also have an impact in high value commercial litigation, particularly in relation to the costs of interim applications or hearings. In Vitol Bahrain EC v Nasdec General Trading LLC (Commercial Court, 5 November 2013) Mr Justice Males described the costs of a one-day contested jurisdiction hearing as "grossly disproportionate" where the parties had spent £242,700 and £165,400 respectively in the context of a claim worth US$119 million. On summary assessment the court awarded a reduced figure of £75,000.
Note: Content up to date as at 16 January 2017
Click here to return to the ”Handy client guide to the Jackson reforms” home page, or on the links below to access information on other Jackson topics:
- Contingency fees or damages-based agreements (DBAs)
- Conditional fee agreements (CFA s) / after the event (ATE) insurance
- 10% increase in general damages
- Costs management
- Qualified one-way costs shifting (QOCS) for personal injury claims
- Part 36 offers
- Witness statements
- Case management